5 Mistakes That Can Cost You a Major Client, Part 3

A business can be profitable on paper and still run out of money. 

That’s why the fifth and final risk in this series deserves special attention. Winning larger clients  can increase revenue and profitability, but it can also place significant pressure on cash flow  because you may have to pay employees, suppliers, contractors, and operating expenses  weeks or even months before receiving payment from the customer. 

The final mistake is simple: failing to protect your cash flow while your business grows. Mistake #5: Confusing Revenue With Cash 

Suppose you win a $100,000 contract. That’s exciting, but if you have to spend $60,000 fulfilling  the agreement before the client pays the first invoice, you’ve created a cash requirement that  your business must finance. 

The larger the client, the more important this becomes. Larger organizations may have  established purchasing and payment procedures that are considerably different from those of  your smaller customers. 

A signed contract doesn’t pay your bills. Cash in the bank does. 

Understand the Payment Process Before Work Begins 

Don’t wait until an invoice is overdue to learn how your client’s accounts payable system works. 

Before beginning the engagement, understand exactly how invoices must be submitted, what  information they require, who approves them, and what payment terms apply. Determine  whether purchase orders, vendor registration, electronic payment systems, or other documentation are required. 

Identify the appropriate accounts payable contact as well as your primary business contact. 

A surprising number of payment delays occur not because the client refuses to pay, but  because an invoice was incorrect, incomplete, sent to the wrong person, or never entered  properly into the client’s system. 

Invoice Promptly and Accurately 

The clock on payment terms usually doesn’t begin until the invoice is received and accepted.  Waiting a week or two to send an invoice simply extends the amount of time you’re financing  the client’s business. 

Create a consistent invoicing process. Send invoices promptly, verify their accuracy, include all  required documentation, and confirm that important invoices have been received when  appropriate.

Small administrative improvements can produce significant improvements in cash flow. Create a Professional Collection Process 

Following up on an unpaid invoice doesn’t have to damage a client relationship. In fact, a clear  and professional process can prevent payment issues from becoming personal. 

Establish a schedule for reminders before and after invoices become due. Keep accurate  records of communications and escalate overdue accounts appropriately. 

Don’t wait until your own cash position becomes desperate before making the first call. Your  client has a payment process. You should have a collection process. 

Forecast Cash, Not Just Sales 

Many owners know how much they’ve sold but don’t have a clear picture of when the money  will actually arrive. 

Create a simple rolling cash flow forecast showing expected receipts and upcoming  obligations. At minimum, monitor payroll, rent, taxes, loan payments, supplier obligations,  insurance, major purchases, and other significant expenses. 

Then compare those obligations with the timing of expected customer payments. This allows  you to identify potential shortages while there is still time to do something about them. 

Build a Cash Reserve 

Strong businesses prepare for disruptions before they occur. Clients may pay late, sales may  slow, equipment may fail, an important employee may leave, or an unexpected opportunity  may require immediate investment. 

A cash reserve gives you time and choices. 

The appropriate amount will vary according to the business, its cost structure, revenue stability,  and risk. What’s important is making cash reserves part of your financial strategy rather than  hoping there will always be enough money available. 

Establish Financial Options Before You Need Them 

If your business may require a line of credit or another source of working capital, establish the  relationship when the company is financially healthy. Banks and other lenders are generally  easier to work with when you don’t desperately need the money. 

The same principle applies to suppliers. Strong relationships and well-negotiated payment  terms can provide valuable flexibility when the business is growing rapidly. 

Prepare financial options in advance rather than searching for emergency financing during a  crisis.

Growth Can Consume Cash 

This is one of the most important financial lessons for a growing company. 

Rapid growth often requires more cash, not less. New employees must be paid, inventory may  need to be purchased, additional marketing may be required, and infrastructure may have to  expand before the corresponding customer payments arrive. 

That’s why owners need to examine three things together: revenue, profit, and cash flow. A  healthy company needs all three. 

Watch the Profitability of Major Accounts 

Cash flow problems can also expose a deeper issue: an account that generates impressive  revenue but inadequate profit. 

Review the true economics of important clients periodically. Include labor, materials,  management time, special requests, discounts, travel, technology, financing costs, and other  expenses required to serve the account. 

If the relationship isn’t sufficiently profitable, don’t wait until cash becomes critical. Adjust the  price, scope, delivery model, or terms while you still have options. 

The Bottom Line 

Larger clients can create extraordinary opportunities, but they can also expose weaknesses in  your financial systems. 

Understand how your clients pay. Invoice quickly and accurately. Follow up professionally.  Forecast your cash needs, build reserves, establish financing options in advance, and make  sure every major account contributes adequate profit. 

Over the last three articles, we’ve examined five risks that can undermine a growing business:  unmet expectations, poorly handled client crises, excessive growth without adequate capacity,  dependence on one customer, and inadequate cash flow. 

Managing these risks doesn’t slow growth. 

It makes sustainable growth possible. 

Call to Action 

Is your business financially prepared for larger clients and faster growth? 

Schedule a complimentary Growth Strategy Session and discover how to strengthen your  profitability, cash flow, operating systems, and client strategy so your next stage of growth  makes your business stronger rather than more vulnerable.